Implementing Policy Flashcards
What is fiscal policy?
Influencing the level of economic activity through manipulation of government income expenditure
What is the budget?
Outlines spending and tax changes und canbe balanced, in a deficit or surplus
What is a tax?
A compulsory contribution to state revenue levied by the government on worker’s income and business profits or added to cost of some goods, services and transactions
Why is tax crucial to fiscal policy
What are the four cannons of taxation?
1) equity
2) certainty
3) convenience
4) economy
What is equity as a cannon of taxation
The taxes people or organisations have to pay should be proportional to their income
- “ability-to-pay principle” the more you earn the higher your taxes should be
What is certainty as a cannon of taxation?
- the tax should be clear
- everyone should know how much they have to pay and how much they have to pay
What is convenience as a canon of taxation
Timing and method of pay are convenient for the taxpayer
What is the economy as a cannon of taxation
The cost of collecting taxes should be minimised
What is a direct tax ?
A tax that I levied directly on income
What is an indirect tax ?
A tax paid on items of expenditure
What is a progressive tax ?
A tax in which the marginal tax rate increases as income increases
- takes larger percentage of income in taxes from high income groups than low income groups
Arguments for progressive taxes?
- based on the logic of the ability to pay principal
- higher income groups should pay more because they can pay more
What is a regressive tax?
- a tax applied uniformly
- it takes a larger percentage of income from low- income earners than from high-income earners
Details about regressive taxes
- paid regardless of income
- bears more heavily on poorer members of society (greater tax burden)
- inverse relationship between the tax rate and the taxpayers ability to pay
What is a proportional tax
A tax where the rate of taxation is fixed
E.g 20% of one’s income no matter how much you earn
What is the average tax rate?
Tax paid as a proportion of income earned
How do you calculate the average tax rate
Total tax paid/total income x 100
How do you calculate the average tax rate
Total tax paid/total income x 100
How do you calculate taxable income?
Total income - tax free allowance
What is the calculation for the margins tax rate ?
Change in tax paid/change in income x 100
What is a flat rate tax system?
Al tax payers pay the same amount of tax regardless of income
Why is a flat rate tax system good?
- simple and efficient to implement
- can provide better incentives to those on higher incomes
Why is a flat rate tax system bad?
- it is not equitable
- does not allow for redistribution of income between he rich and poor (key macroeconomic objective)
What are he two types of government expenditure?
Current and capital expenditure
What is government current expenditure?
- spending by the government on goods and services for immediate use
- e.g wages, medicine for the NHS
What is government capital expenditure
- spending by the gov on capital projects that is investment for the future benefit of the country
- intended the facilitate long run economic growth
What is a government budget deficit
A situation in which the government expenditure exceeds tax revenue
What is a government budget surplus
A situation in which government expenditure is less than government revenue
What is a government balanced budget
A situation in which government expenditure equals government revenue
What is the public sector net cash requirement
The rate at which the British government must borrow money in order to maintain its financial commitments
What is the cyclical budget deficit
Government gets less tax and spend more in a recession due to unemployment benefits increasing
What is a structural deficit
The level of deficit even when the economy is at full employment
What is the national debt
The total amount of government debt based on accumulated previous debts and surpluses
What are the economic effects of a budget deficit
- increased borrowing
- higher debt interest payments
- increased AD
- higher taxes and lower spending
- increased interest rates
- crowding out
- inflation
How does a government achieve its macroeconomic objectives through fiscal policy
- automatic stabilisers
- discretionary fiscal policy
What are automatic stabilisers
The process by which government expenditure and revenue vary with the economic cycle thereby helping to stabilise the economy
What is discretionary fiscal policy?
The deliberate alteration of gov spending of taxation to help achieve desirable macroeconomic objective by changing the level + composition of AD((increasing or decreasing)
What is crowding out
A process by which an increase in government expenditure crowds out private sectors activity by raising the cost of borrowing
